One year and three months after establishing capital controls in an effort to curb the appreciation of the peso, the Colombian government announced that, beginning September 1, restrictions for foreign portfolio investment in equities will be eliminated. The restriction consisted in a mandatory non-interest-bearing 40% deposit (increased to 50% in April 2008) for foreign portfolio investment that should be kept at the Central Bank for 6 months. In December 2007, capital controls for the stock market were relaxed, when foreigners investing in IPO´s were exempted from having to make the deposit.
Since the beginning, the government said that this was going to be a temporary measure. More recently, the Ministry of Finance announced that if the exchange rate maintained its upward trend, restrictions on equities could be removed, as it finally happened. During the last month the peso depreciated by 8.5% against the dollar and it is up by 17% from its low for the year, registered in June.
The restriction on foreign portfolio investment was not effective in curbing currency appreciation (the peso has appreciated by 8% since controls were imposed), and was harmful to the Colombian stock exchange. In 2008, the Colombian equity market showed a very poor performance: between January and August the IGBC had a return of –9%, and of –9.7% during the last 12 months.
The Colombian Stock Exchange is highly dependent on local investors, who account for 98% of daily transactions. Since the end of last year, they have been away from the equity market because of higher risk aversion, and the increase in inflation and interest rates locally. Therefore, even though many Colombian companies have shown excellent results, this has not reflected in stock prices. As a matter of fact, only 4 stocks from the IGBC, besides Ecopetrol, exhibit a positive return in 2008, while the rest remain negative.
In addition, even after the issuance of Ecopetrol shares at the end of last year, when market capitalization rose by 70%, trading volume remained at very low levels. Currently, on average, Ecopetrol accounts for 60% of daily transactions, and its weight on the Colombian Index (IGBC) is close to 40%. After Ecopetrol began trading, the rest of the stocks lost liquidity.
Therefore, the removal of capital controls is very good news for the Colombian Stock market, and could represent a recovery of its liquidity: the day of the announcement, the IGBC increased by 3.5%, with a trading volume of U$100 million, more than double last month’s average daily volume (U$40 million). Of course, it is also a good signal for those companies planning to make new issuances in the local market. It is definitely a step in the right direction.
However, controls were kept for the fixed income market, because the Government fears that, given that the interest rate spread between Colombian Bonds and US Bonds is still very high (around 1000 bps), it could attract a big influx of dollars, which will reverse the recent depreciation of the currency. Therefore, even though it is very difficult to think that they will be eliminated soon, hopefully the government will continue to gradually remove all barriers. This will help, on the one hand, to lower the Ministry of Finance´s domestic financing cost and on the other hand, the return of many portfolios, such as pension funds, who have 50% of their assets invested in Colombian TES.